TT RAM MOHAN's comments on the Indian economy, banking and current affairs

Wednesday, September 16, 2015

All eyes on the Fed tomorrow

Will she, won't she?

We shall know tomorrow whether Janet Yellen intends to hike interest rates, right away or in the near ftuure?

Emerging markets face turmoil but some emerging markets think the Fed should go right ahead; at least, it will end the uncertainty they have been facing. On the Fed itself, opinion is divided. Gavyn Davies, writing in the FT, outlines the options:

The first and more likely option is a “hawkish postponement”, under
which she explains that the conditions have not quite been met, but that
the bulk of the committee believes this will happen by December. I am
not sure that would do much to clear the air.The second is the so-called “one and done” option, under which the
FOMC raises rates by 0.25 per cent (or even conceivably by 0.125 per
cent), and the “dots” show that no further rate rise is expected in
October or December, except by a small handful of hawks.This option seems to be gaining ground in the public commentary, on
the grounds that it would get the bad news out of the way. But the
markets know from past experience that they should take the first rate
hike seriously as a guide to the Fed’s underlying attitude, and they
would probably reprice short rates in 2016 upwards.A final, more dovish, option — to keep rates unchanged, and also to
eliminate the expectation of a rise in December — is probably not one
that Ms Yellen could guide through the committee, even if she wanted to
do so.